The concept of performance requirements is relatively new and nascent in the project/service delivery landscape of the U.S. highway industry. Adopting performance requirements for use in regular or routine practice represents a significant step forward for an agency. The agency's procurement team, especially the leaders of various technical disciplines, may have to embrace a new approach that is vastly different from the traditional D-B-B mindset. For example, the agency will need to develop requirements with a focus on lifecycle and operational performance, conduct "oversight" of the delivery of a service and an asset, and understand their legal consequences. Changes may be needed in the procurement workflow, such as allowing more time for drafting performance requirements and the ATC process, and bringing O&M staff into the procurement process to help draft or review the performance requirements for the highway "service". Further, the use of performance requirements represents a paradigm shift for the industry as well. The private sector needs to adapt to the evolving perspectives of a "whole life" or "output" based approach when interpreting technical requirements. Training may be necessary for both agency and private sector staff to help adapt to the shift in roles and responsibilities, the need for performance-oriented perspectives, and change in delivery environment. Recognizing these challenges, this section presents a discussion of implementation strategies, including change management, training needs, and institutional capacity building.
Drafting true performance requirements that bring out the most innovative solutions for design and construction items is an important agency exercise for P3s. The agency needs to understand the important attributes that constitute good performance requirements. The following paragraphs present some of the salient points to consider in drafting performance requirements:
It is challenging, and may even be impossible, to prepare 100 percent pure performance-based requirements. In some cases, drafting these performance requirements may require a few limited prescriptive inputs and methods in order to set proper expectations and avoid misunderstanding. However, prescriptive inputs could be the result of a need to address physical project or stakeholder commitment constraints, and not simply due to preference.
Capacity building to procure and administer P3 contracts includes culture change management, particularly with respect to design and construction oversight. Traditional roles of the agency in these areas will undergo a departure from current practice. In many P3 transactions, the agency's responsibility for design and construction engineering is changed from the "doer" to the "administrator." In other words, agencies become responsible for contract management and oversight of the private partner. This cultural change in roles may lead to a shift in the types of technical skills required within an agency. There may be less need for hands-on design, and more need for understanding and setting of broader performance standards covering the lifecycle operational and maintenance characteristics of the assets, and project management and oversight. Some key aspects to consider include the following:
Potential role of an independent engineer in acceptance of work and substantial completion/final acceptance. This affords the following advantages:
The use of an independent engineer is commonly tied to project finance in the power industry and international transportation P3s. However, current state laws often limit ability to transfer approval powers to the independent engineer (e.g., California law does not allow this and Florida law limits the role of the independent engineer).
Several novel aspects of P3 procurement demand training of the agency's P3 staff. Training needs are required to cover the following aspects at a minimum:
In traditional delivery, environmental, planning, engineering, financial, legal, procurement, operation and maintenance, and rehabilitation experts may be housed in different offices because the traditional project development process steps are often sequential. However, these experts need to coordinate more closely in a P3 service delivery. Many of the project development steps need to be carried out on a collaborative and iterative basis, requiring more frequent interactions and internal coordination. Developing projects iteratively, rather than sequentially, may require forming and managing multidisciplinary teams that understand the interactions of various technical, financial and legal factors. This can facilitate an iterative project development process. It is important to understand the financial, lifecycle operational and maintenance characteristics and legal contractual implications of any performance requirement that the agency develops.
Additionally, it might be required to conduct end-user surveys upfront to find out what operational issues (e.g., safety, comfort, accessibility, travel time, etc.) are most relevant to them. Finally, engaging the proposers in discussions at the procurement phase can help in drafting effective performance measures-this is a major change from traditional delivery.
A challenging area of P3 procurement is the cultural shift in operational audit and contract management. Some of the salient aspects to bear in mind are noted below.
The availability of specific skills needed to develop, deliver, and manage P3s can represent a major implementation challenge. Implementing successful P3s in large part relies on the abilities of the individuals tasked with making them work. Having the right mix of skills is vital to the integrity of the program. A good understanding of the various facets of setting performance requirements strengthens the negotiating position of the government and helps ensure that projects get implemented successfully.
Unless the agency is deeply experienced in delivering P3s, there will be a need to hire procurement experts and/or specialist advisors such as lawyers, financial analysts, and engineering specialists to support the agency during the RFP phase. It might not be practical to cultivate these skills in-house at the start of a P3 program, especially when opportunities to work on a P3 project may be intermittent. Consultant advisors in the P3 space may be more expensive on a per hour basis than agency employees, but they usually bring skills that may not be cost-efficient for the agency to maintain in-house on a permanent basis (e.g., financial analysis, risk analysis, value-for-money analysis, etc.). These advisors can bring expertise from other engagements and do not need to find continuing roles in the agency once their work is complete.
Consultant advisors can be brought in as a team or individually, in which case agencies should ensure coordination among the various team members and the agency staff. These advisors should be brought into the process early and should be paired with agency counterparts. Additionally, agencies will need to train or hire internal staff to be capable of understanding and managing the P3 process and managing the agreement once it is signed. In some cases, advisors hired to assist on a P3 project can also be used to train internal staff. Many of the agency design, engineering, construction, and oversight staff would need to be trained to cross collaborate in drafting performance requirements. Key areas of collaboration include: (i) construction and operations so that construction requirements do not restrict efficient operations; and (ii) construction and maintenance regarding renewals so that maximum flexibility is given to the P3 private partner to optimize the trade-off between initial construction and the need for more frequent interventions.
United States v. Spearin remains a landmark construction law case. Under the Spearin doctrine, a contractor will not be liable to an agency for loss or damage resulting solely from defects in the plan, design, or specifications provided to the contractor. The agency is deemed implicitly to warrant that its detailed design or method-based specifications are accurate and, if followed, will result in a functioning system. In any claim for liability based on a defective specification, the plaintiff must show that not only is the specification at issue detailed enough for the Spearin doctrine to apply, but also that the alleged defects in the specification have directly resulted in the agency's loss or damage. Notwithstanding a finding that a particular specification is a design specification, if the contractor is unable to show that the specification caused additional costs and project delays, it will not be granted relief.
The Spearin doctrine was developed in the context of a D-B-B construction project where the agency produced the design documents, supplied these documents to a construction contractor, and the contractor constructed the project in accordance with these design documents. However, the applicability of the Spearin doctrine is less certain where the same contractor or developer designs, and constructs (and operates and finances) the project on behalf of the agency as is the case with Design-Build or a P3.
Case law precedent on this issue is not robust. Nevertheless, a decision in 2013 by the U.S. Civilian Board of Contract Appeals is instructive regarding the limits to an agency's ability to transfer risk to a contractor by assigning the contractor design responsibility. In its decision, the Board held that, even where the contractor's method of excavating a hillside had flaws, the agency's defective specifications in the procurement documents (including incorrect dimensions in the prescriptive specifications for the hillside wall and inaccurate geotechnical report) and the contractor's discovery of unanticipated subsurface conditions were responsible for the subsequent instability of the hillside (Drennon Construction & Consulting, Inc. v. United States Department of the Interior, 2013).
The legal distinction between design (or generally "prescriptive") specifications and performance requirements is straightforward. A design specification "set[s] forth in precise detail the materials to be employed and the manner in which the work is to be performed" (J.L. Simmons Co vs United States, 1969). The contractor is obligated to follow such specification without deviation, "as one would a roadmap." This contrasts with a performance requirement, which is the preferred type on a P3 project where the same contractor both designs and constructs the project as a subcontractor to the P3 private partner's SPV. A typical performance requirement "set[s] forth an objective or standard to be achieved" leaving contractor discretion in how it chooses to meet that objective. The agency's warranty under the Spearin doctrine does not apply to performance requirements. Instead, the contractor (i.e., P3 private partner) is deemed to have assumed the risk of designing and constructing to meet the performance criteria.
While straightforward, the distinction between design specifications and performance criteria is not absolute. In distinguishing between design specifications and performance based specifications and resulting liability, courts look at a mixture of legal and factual considerations. Courts look to the obligation created by the criteria. Merely labeling a specification "design" or "performance" is not enough to create, relieve, or limit liability of the contractor/P3 private partner or agency. A simple way to determine whether a specification falls into the category of a "design" specification or "performance" requirement, is to ask whether it specifies "inputs" to the project (i.e., requiring a specific material such as steel or concrete) or "outcomes" for the completed project (i.e., load-bearing capacity, years of useful life, etc.). Rulings in some instructive cases are summarized below:
Differing site conditions is a major risk that is typically retained by the agency in D-B-B contracts but can lead to expensive claims for time and cost of redesign. The common differing site conditions clause gives the contractor cost and time relief for (a) subsurface or latent physical conditions encountered at the site that differ materially from those indicated in the contract, 2 or (b) unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inherent in the work provided for in the contact. Differing site conditions may include not only geotechnical issues but also major unknown underground utilities. Note that Federal Regulations 23 CFR 636.114 encourages, but not requires, the consideration of differing site conditions when allocating risks in the RFP document.
In P3 Agreements, the agency may seek to absolve itself of any responsibility for errors or omissions in agency-supplied information, including geotechnical and utility information. However, the better practice is some form of explicit risk sharing based on the extent of investigation undertaken by the agency, the proposer's opportunity to conduct its own investigation prior to making its proposal and the cost in doing so, and the perceived risks in the particular site.
The leading case that supports giving a design-builder (and by extrapolation a P3 private partner) a remedy for differing site conditions in spite of disclaimers is Metcalf Construction Co. v. United States, 742 F.3d 984 (Federal Circuit 2014). The federal court of appeals in that case held:
"Nothing in the contract's general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the government's affirmative representations about the soil conditions."
Some owners provide the winning P3 private partner proposer a limited period of time following contract execution to validate information provided by the agency, or a "scope validation period." By this device, the agency retains the risks of differing site conditions until the design-builder has had the appropriate opportunity to validate the information provided in the request for proposals. Where the P3 private partner cannot obtain immediate access to the site, or certain portions of the site, this period may need to be extended.
Where transferring all the risk to the P3 private partner could result in very large contingencies in the pricing or even in discourage proposals, the agency may agree to retain a portion of the site condition risk by making dedicated a pool of funds or "allowance" available to the project in order to deal with unanticipated conditions. Any costs above that amount would be absorbed by the winning P3 private partner (Loulakis et al, 2015). Note that, due to the constraints of the financing in a P3 and the need for a fixed AP or toll bid, the scope validation approach is not applicable; however, an "allowance" approach to sharing the middle "slice" of the risk is applicable. In this case, the first loss and duty to mitigate apply first to the P3 private partner, then the allowance is used to share the cost in a defined range. For extreme events the full risk is covered by the public partner (as "insurer")
A proprietary specification is created when the description of a product or process cites a specific brand name or is written so narrowly that only one manufacturer could supply the desired item. Where a contract uses a proprietary specification, the contractor has no discretion but is bound to use it, and, therefore, has the benefit of the agency's implied warranty under the Spearin doctrine and is not held liable if the product fails to perform or is defective (WRB Corp. v. United States, 1968; Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 1970).
While the use of performance criteria is the preferred practice of the federal government, FAR 11.104 acknowledges that the use of "brand name or equal" clauses may be advantageous under certain circumstances (USGPO, 2016c). Pursuant to FAR 11.104(b), such clause "must include, in addition to the brand name, a general description of those salient physical, functional, or performance characteristics of the brand name item that an "equal' item must meet to be acceptable for award." FHWA has issued the following guidance on use of "brand name or equal" clauses (FHWA Technical Advisory HIAM-20, 2010 and FHWA Construction Program Guide, 2016):
"The use of trade names in specifications can sometimes be avoided by writing requirements in terms of desired results. A generic, end-result specification is preferable to specifying a proprietary product because it can promote competition. However, simply deleting the name of the product while retaining all of the salient characteristics from the manufacturer's literature or cut sheets would not necessarily create a non-restrictive specification. Without providing some range of quality or performance, it may still be possible that only one manufacturer or vendor could meet the performance criteria. Adding the phrase "or equal' next to a brand name similarly does not make a proprietary specification competitive if the technical requirements can only be met by the named brand. To ensure a specification is competitive, a reasonable number (as determined by the division office) of manufacturers or vendors should be able to provide or achieve the specified results."
Hence, because a "brand name or equal" specification allows the contractor to propose an alternative to the brand name, it is treated as a type of performance requirement.
In Florida Board of Regents v. Mycon Corp., the specification at issue required the contractor to "provide a skin plate with a smooth, non-corded "true radius' forming surface, equal to that manufactured by Symons." 3 The court stated that "a contract provision calling for quality of the product to be the equivalent of a specific manufactured product is a performance specification, involving no implied warranty, unlike a design specification." 4 The court found nothing in the contract to contain elaborate, detailed instructions on how to perform the contract and held that the reference to Symons skin plate was not enough to rise to the level of a proprietary specification. 5
In Aerodex, Inc. v. United States, the contract identified a brand name thermal resistor "or approved substantial equal." 6 However, the issue arose due to the fact that the identified brand name product was not commercially available and the government was unable to provide material specifications such that the contractor could find a "substantial equal." 7 The contractor was able to locate a manufacturer that could manufacture a "substantial equal," but sustained costly delays due to the fact that it was required to develop a testing procedure as there was no available testing procedure or equipment to verify compliance with the performance specifications. 8
The Aerodex court stated, "[i]t is not enough for the Government to say ... that because it was a performance-type specification, the contractor was obligated to select whatever method it desired to produce the required result. This oversimplifies the burden[.]" 9 Despite treating this as a performance specification, the court looked at the duty of the contractor to inquire about availability during the procurement with the duty of the government to inform the proposer of the availability of the product or the material specifications and testing procedure for approving a "substantial equal," and ultimately ruled in favor of the contractor stating that the government "was in a far better position than plaintiff ... to tell whether the resistor would be available from [manufacturer] and, if not, whether the plans would be available." 10
Eslin Co. is often cited for the principle that the term "or equal" is interpreted to mean "functionally equivalent to the brand name product, but not necessarily the same in every detail." 11 The specification at issue was for windows and called for "Pella Clad TD Double-Hung and Pella LD units" or equal. The specification did not list salient characteristics, but instead listed related performance criteria including manufacturing standards, water tightness, and air leakage. 12 The government withheld approval of the contractor's proposed "or equal" because it did not have a particular sash size that only Pella products met unless the windows were specially manufactured. The Agricultural Board of Contract Appeals treated the performance criteria as the salient characteristics and held that the absence of the particular sash size did not prevent the proposed product from being "functionally equivalent" because there was nothing that notified contractor that the sash size was a salient characteristic. 13
As noted in Section 1, most P3 agreements establish an order of precedence that is to be used in resolving conflicts or differences between contract requirements found in the different contract documents. FAR 52.236-21 (USGPO, 2016c), incorporated into government prime construction contracts contains language that, "[i]n the case of difference between drawings and specifications, the specifications govern." Typically, such order of precedence provisions will provide that if a contract document contains differing provisions related to the same subject matter as in another contract document, the provisions that establish the higher quality manner or method of performance, or use more stringent standards, will prevail. While order of precedence provisions in a contract should never substitute for properly coordinated detailed plans, specifications, and terms and conditions, such provisions provide necessary guidance in the event there is an issue that arises from a conflict within the contract documents.
In an effort to hold a P3 private partner contractually liable for commitments made in its proposal, an agency may incorporate the technical proposal into the P3 agreement. In doing so, there is some level of risk arising from the fact that owners may not have the time nor staff to fully vet a proposal, leaving open the potential of conflict between the proposal and the relevant contractual requirements. Use of an order of precedence clause placing the contract documents at a higher level than the proposal can be a way to manage that risk.
2 To establish entitlement to an equitable adjustment based upon a subsurface or latent physical differing site condition, a plaintiff must demonstrate by a preponderance of the evidence that (1) the Contract affirmatively represented the subsurface conditions of the work site that form the basis of the instant claim; (2) plaintiff acted as a reasonably prudent contractor in interpreting the Contract; (3) plaintiff reasonably relied upon the Contract's indications of subsurface conditions; (4) the subsurface conditions actually encountered at the work site differed materially from the subsurface conditions of the work site indicated in the Contract; (5) the subsurface conditions actually encountered were unforeseeable; and (6) plaintiff's claimed excess costs are solely attributable to the materially different subsurface conditions at the work site. Kiewit Construction Company v. United States, 56 Fed. Cl. 414 (2003), citing Weeks Dredging & Contracting, Inc. v. United States, 13 Cl. Ct. 193, 218 (1987), aff'd, 861 F.2d 728 (Fed. Cir. 1988).
3 651 So.2d 149 (Fla. 1st DCA 1995).
4 Id. at 153
5 Id. at 154
6 417 F.2d 1361 (1969).
7 Id. at 1363.
8 Id.
9 Id. at 1370.
10 Id. at 1366.
11 Michael C. Loulakis, Esq. & James B. McDaniel, Legal Aspects of Performance-Based Specifications for Highway Construction and Maintenance Contracts, NCHRP Legal Research Digest 61 (2013), citing Eslin Co., AGBCA No. 90-222-1, 93-1 B.C.A. (CCH) 25, 321 (1992).
12 Id. at 44.
13 Id.